FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1997 Commission file number: 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2530374
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 East King Street
P. O. Box 250, Shippensburg, Pennsylvania 17257
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 532-6114
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1997
(Common stock, no par value) 976,863
Page 1 of 13 pages
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets - March 31, 1997
and December 31, 1996 3
Condensed consolidated statements of income - Three months
ended March 31, 1997 and 1996 4
Condensed consolidated statements of cash flows - Three months
ended March 31, 1997 and 1996 5
Notes to condensed consolidated financial statements 6 and 7
Management's discussion and analysis of financial condition
and results of operations 8 - 11
PART II - OTHER INFORMATION 12
Signatures 13
Page 2 of 13 pages
PART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1997 1996 *
ASSETS (Unaudited)
(000 Omitted)
Cash and due from banks $ 5,300 $ 5,236
Interest-bearing deposits with banks 30 1,554
Federal funds sold 6,154 2,936
Securities available for sale 36,367 33,421
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 983 934
Loans 112,198 108,926
Allowance for loan losses ( 1,657) ( 1,620)
Net loans 110,541 107,306
Bank premises and equipment, net 4,063 3,916
Other assets 2,617 2,253
Total assets $ 166,055 $ 157,556
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 17,098 $ 16,322
Interest-bearing 125,604 120,937
Total deposits 142,702 137,259
Federal funds purchased and other borrowed money 5,334 2,339
Other liabilities 2,074 2,102
Total liabilities 150,110 141,700
STOCKHOLDERS' EQUITY
Common stock, no par value - $ .2083 stated
value per share at March 31, 1997 and
December 31, 1996 2,000,000 shares authorized
with 976,863 shares issued 204 204
Additional paid-in capital 10,625 10,625
Retained earnings 5,159 4,786
Unrealized holding gain, (loss) net of tax
$ 22 and $ 124 at March 31, 1997 and
December 31, 1996, respectively ( 43) 241
Total stockholders' equity 15,945 15,856
Total liabilities and stockholders'
equity $ 166,055 $ 157,556
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
Page 3 of 13 pages
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 1997 and 1996
(UNAUDITED)
1997 1996
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 2,491 $ 2,366
Interest on federal funds sold 45 43
Interest and dividends on investment securities 565 476
Interest income on deposits with banks 2 21
Total interest income 3,103 2,906
Interest Expense
Interest on deposits 1,260 1,223
Interest on borrowed money 40 37
Total interest expense 1,300 1,260
Net interest income 1,803 1,646
Provision for loan losses 45 60
Net interest income after provision for loan
losses 1,758 1,586
Other Income
Service charges on deposits 143 99
Other service charges 58 35
Other 139 122
Total other income 340 256
Other Expenses
Salaries and employee benefits 699 600
Net occupancy and equipment expense 178 147
Other operating expense 430 354
Total other expense 1,307 1,101
Income before income taxes 791 741
Income tax expense 232 207
Net income $ 559 $ 534
Weighted average number of shares outstanding 976,863 976,863
Net income per share $ .57 $ .55
Cash dividends declared per share $ .19 $ .17
The accompanying notes are an integral part of these condensed
financial statements.
Page 4 of 13 pages
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1996
(UNAUDITED)
1997 1996
(Unaudited) (Unaudited)
(000 Omitted)
Cash flows from operating activities:
Net income $ 559 $ 534
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 71 62
Provision for loan losses 45 60
Other, net ( 246) ( 327)
Net cash provided by operating activities 429 329
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks 1,524 ( 279)
Purchase of available for sale securities ( 4,196) ( 39)
Maturities of available for sale securities 820 372
Purchases of FHLB stock ( 49) ( 65)
Net (increase) in loans ( 3,280) ( 713)
Purchases of bank premises and equipment -
Net ( 218) ( 218)
Net cash provided (used) by investing
activities ( 5,399) ( 942)
Cash flows from financing activities:
Net increase in deposits 5,443 3,893
Proceeds from long-term debt 3,000 0
Payments on debt ( 5) ( 5)
Cash dividends paid ( 186) ( 166)
Net cash provided (used) by financing
activities 8,252 3,722
Net increase in cash and cash equivalents 3,282 3,109
Cash and cash equivalents, beginning balance 8,172 6,647
Cash and cash equivalents, ending balance $ 11,454 $ 9,756
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 1,293 $ 1,214
Income taxes 43 21
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments
available for sale (net of deferred taxes
of $ (146) and $ (27) at March 31, 1997 and
1996, respectively) ( 284) 52
Other real estate acquired in settlement of loans 0 93
The accompanying notes are an integral part of these condensed
financial statements.
Page 5 of 13 pages
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(UNAUDITED)
Note 1. Basis of Presentation
The financial information presented at and for the three
months ended March 31, 1997 and 1996 is unaudited.
Information presented at December 31, 1996 is condensed from
audited year-end financial statements. However, unaudited
information reflects all adjustments (consisting solely of
normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the
financial position, results of operations and cash flows for
the interim period.
Note 2. Principles of Consolidation
The consolidated financial statements include the accounts of
the corporation and its wholly-owned subsidiary, Orrstown
Bank. All significant intercompany transactions and accounts
have been eliminated.
Note 3. Cash Flows
For purposes of the statements of cash flows, the corporation
has defined cash and cash equivalents as those amounts
included in the balance sheet captions "cash and due from
banks" and "federal funds sold". As permitted by Statement
of Financial Accounting Standards No. 104, the corporation
has elected to present the net increase or decrease in
deposits in banks, loans and time deposits in the statement
of cash flows.
Note 4. Federal Income Taxes
For financial reporting purposes the provision for loan
losses charged to operating expense is based on management's
judgment, whereas for federal income tax purposes, the amount
allowable under present tax law is deducted. Additionally,
certain expenses are charged to operating expense in the
period the liability is incurred for financial reporting
purposes, whereas for federal income tax purposes, these
expenses are deducted when paid. As a result of these timing
differences, deferred income taxes are provided in the
financial statements. Federal income taxes were computed
after reducing pretax accounting income for nontaxable
municipal and loan income.
Note 5. Other Commitments
In the normal course of business, the bank makes various
commitments and incurs certain contingent liabilities which
are not reflected in the accompanying financial statements.
These commitments include various guarantees and commitments
to extend credit and the bank does not anticipate any losses
as a result of these transactions.
Page 6 of 13 pages
Note 6. Earnings Per Share of Common Stock
Earnings per share of common stock were computed based on an
average of 976,863 shares at March 31, 1997 and 1996.
Note 7. Investment Securities
Management determines the appropriate classification of
securities at the time of purchase. If management has the
intent and the corporation has the ability at the time of
purchase to hold securities until maturity or on a long-term
basis, they are classified as securities held to maturity and
carried at amortized historical cost. Securities to be held
for indefinite periods of time and not intended to be held to
maturity or on a long-term basis are classified as available
for sale and carried at fair value. Securities held for
indefinite periods of time include securities that management
intends to use as part of its asset and liability management
strategy and that may be sold in response to changes in
interest rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk
changes.
Realized gains and losses on dispositions are based on the
net proceeds and the adjusted book value of the securities
sold, using the specific identification method. Unrealized
gains and losses on investment securities available for sale
are based on the difference between book value and fair value
of each security. These gains and losses are credited or
charged to shareholders' equity, whereas realized gains and
losses flow through the corporation's operations.
Management has classified all investments securities as
"available for sale". Amortized cost exceeded the fair
market value of available for sale securities by $ 65,000 at
March 31, 1997. Fair market value exceeded amortized cost
of available for sale securities by $ 365,000 at December 31,
1996. This resulted in a decrease in stockholders'
equity of $ 43,000 at March 31, 1997 and an increase in
stockholders' equity of $ 241,000 at December 31, 1996 after
recognizing the tax effects of the unrealized gains (losses).
Page 7 of 13 pages
ORRSTOWN FINANCIAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net after tax income for the first quarter of 1997 was
$ 559,000 compared to $ 534,000 for the same period in 1996
representing an increase of $ 25,000 or 4.7%. Net income on an
adjusted per share basis for the first three months was $ .57 up $ .02
from the $ .55 per share realized during the quarter ended March 31,
1996.
RESULTS OF OPERATIONS
First Quarter 1997 vs. First Quarter 1996
Interest income for the first quarter of 1997 was $ 3,103,000
compared to $ 2,906,000 as of March 31, 1996, for an increase of
$ 197,000. The increase is due primarily to an increase in interest
on loans as the result of higher loan volumes. Gross loans at
March 31, 1997 stood at $ 112,198,000 compared to $ 108,926,000 as of
December 31, 1996.
Interest expense for the current quarter was $ 1,300,000, an
increase of $ 40,000 over the $ 1,260,000 for the same period of the
prior year. Deposit volumes increased since the first of the year
with increases mixed between time, savings, and interest bearing
demand deposits. Average rates have decreased slightly over those
paid in the first quarter 1996 resulting in smaller increases in
interest cost compared to the increases experienced as of March 31,
1996.
Net interest income for the first quarter of 1997 totaled
$ 1,803,000, up $ 157,000 from the first quarter of 1996. Management
continuously monitors liquidity and interest rate risk through its
ALCO reporting and reprices products in order to maintain desired net
interest margins.
OTHER INCOME
First Quarter 1997 vs. First Quarter 1996
Noninterest income increased from $ 256,000 in 1996 to
$ 340,000 in 1997. Increases occurred in trust fees and in service
charges on deposits, as the volume of transaction accounts continue to
grow.
OTHER EXPENSES
First Quarter 1997 vs. First Quarter 1996
Other expenses totaled $ 1,307,000 as of March 31, 1997, an
increase of $ 206,000 over the $ 1,101,000 recorded for March 31,
1996. Employee related expenses were up 16.5% over the first quarter
1996, due primarily to increases in personnel associated with an
additional branch office in Carlisle. Net occupancy and equipment
expenses increased 21.09% while other operating expenses increased
21.5% from the prior year's first quarter.
Page 8 of 13 pages
INCOME TAXES
The effective income tax rate increased slightly from 28% to
29% compared to the same period for 1996.
FINANCIAL CONDITION
Total assets at March 31, 1997 were $ 166,055,000 a 5.4%
increase over December 31, 1996. Gross loans at March 31, 1997
totaled $ 112,198,000, an increase of $ 3,272,000 over the
$ 108,926,000 level at December 31, 1996.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses and the other changes in the
allowance for loan losses are shown below (in thousands):
Quarter Ended
March 31
1997 1996
Balance, beginning of
period $ 1,620 $ 1,433
Recoveries 0 4
Provision for loan loss
charged to income 45 60
Total 1,665 1,497
Losses 8 22
Balance, end of period $ 1,657 $ 1,475
In the opinion of management, the allowance, when taken as a
whole, is adequate to absorb reasonably estimated loan losses inherent
in the Bank's loan portfolio.
Loans 90 days or more past due (still accruing interest) and
those on nonaccrual status were as follows at March 31 (in thousands):
90 Days or More
Past Due Nonaccrual Status
1997 1996 1997 1996
Real estate mortgages $ 153 $ 65 $ 0 $ 58
Installment loans 47 93 31 34
Demand and time loans 11 0 0 16
Credit card 4 8 0 2
Total $ 215 $ 166 $ 31 $ 110
There were no restructured loans for any of the time periods
set forth above.
Total deposits increased to $ 142,702,000 at March 31, 1997
compared to $ 137,259,000 at December 31, 1996. Time deposits
increased approximately $ 2,000,000, while savings and transaction
accounts increased $ 1,500,000 and $ 1,800,000, respectively. Average
rates paid during the first quarter of 1997 remained constant with
rates in place at the end of 1996.
Page 9 of 13 pages
Total equity at March 31, 1997 was $ 15,945,000 representing
9.6% of total assets. This is a $ 89,000 increase from the company's
capital position at December 31, 1996.
A comparison of Orrstown Financial Services' capital ratios to
regulatory minimum requirements at March 31, 1997 is as follows:
Orrstown Financial Regulatory Minimum
Services Requirements
Leverage ratio 9.6% 4%
Risk based capital ratios:
Tier I (core capital) 12.7% 4%
Combined tier I and tier II
(core capital plus allowance
for loan losses) 14.0% 8%
BALANCE SHEET ANALYSIS
The following table highlights the changes in the balance
sheet. Since period end balances can be distorted by one-day
fluctuations, an analysis of changes in average balances is provided
to give a better indication of balance sheet trends.
AVERAGE BALANCE SHEETS
THREE MONTHS ENDED MARCH 31
(000 OMITTED)
ASSETS 1997 1996
Securities available for sale:
Taxable interest income $ 21,280 $ 18,027
Nontaxable interest income 13,196 11,326
Total available for sale
securities 34,476 29,353
Other investments 1,353 1,206
Loans (net of unearned discounts) 110,343 102,867
Other short-term investments 3,486 3,253
Total interest earning assets 149,658 136,679
Allowance for loan losses ( 1,642) ( 1,462)
Cash and due from banks 4,413 5,791
Bank premises and equipment 4,015 3,125
Other assets 2,337 2,897
Total assets $ 158,781 $ 147,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits $ 29,341 $ 25,756
Savings deposits 26,153 26,065
Time deposits 66,767 62,224
Long-term borrowings 2,594 2,342
Total interest bearing
liabilities 124,855 116,387
Page 10 of 13 pages
AVERAGE BALANCE SHEETS
THREE MONTHS ENDED MARCH 31
(000 OMITTED)
1997 1996
Demand deposits $ 16,152 $ 14,156
Other liabilities 1,930 1,577
Total liabilities 142,937 132,120
Stockholders' equity 15,844 14,910
Total liabilities and
stockholders' equity $ 158,781 $ 147,030
Page 11 of 13 pages
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
Page 12 of 13 pages
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/
(Kenneth R. Shoemaker,
President) Duly Authorized
Officer)
Date /s/
(Robert B. Russell,
Controller) (Principal
Financial Officer)
Page 13 of 13 pages
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,300
<INT-BEARING-DEPOSITS> 30
<FED-FUNDS-SOLD> 6,154
<TRADING-ASSETS> 983
<INVESTMENTS-HELD-FOR-SALE> 36,367
<INVESTMENTS-CARRYING> 36,367
<INVESTMENTS-MARKET> 36,367
<LOANS> 112,198
<ALLOWANCE> 1,657
<TOTAL-ASSETS> 166,055
<DEPOSITS> 142,702
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,074
<LONG-TERM> 5,334
0
0
<COMMON> 204
<OTHER-SE> 15,741
<TOTAL-LIABILITIES-AND-EQUITY> 166,055
<INTEREST-LOAN> 2,491
<INTEREST-INVEST> 565
<INTEREST-OTHER> 47
<INTEREST-TOTAL> 3,103
<INTEREST-DEPOSIT> 1,260
<INTEREST-EXPENSE> 1,300
<INTEREST-INCOME-NET> 1,803
<LOAN-LOSSES> 45
<SECURITIES-GAINS> (5)
<EXPENSE-OTHER> 1,307
<INCOME-PRETAX> 791
<INCOME-PRE-EXTRAORDINARY> 559
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 559
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
<YIELD-ACTUAL> 5.06
<LOANS-NON> 31
<LOANS-PAST> 215
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,620
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,657
<ALLOWANCE-DOMESTIC> 1,657
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
